As per estimates, over $612 billion was deployed globally across venture capital activity in 2021 — a 108% increase over 2020 — despite several pandemic-related challenges.
While investment activity in North America and Europe more than doubled year-on-year in 2021, the Middle East & North Africa (MENA) region grew at a significantly faster clip. Investment value in MENA increased by 165% year-on-year in 2021.
Although most PE and VC investments still originate in North America, the MENA region is also rapidly attracting interest. More startups, institutional investors, and PE firms are now making the region their home. There is also increasing inbound investment from Middle Eastern sovereign wealth funds.
The reasons for the recent interest in MENA by venture investors include:
MENA-based startups attracted over $1.2 billion in the first half of 2021 — a 64% year-on-year growth. Around 71% of the investments went to startups based in the UAE (mainly through various free zones such as the Dubai International Finance Centre and the Abu Dhabi Global Market), Saudi Arabia, and Egypt.
The UAE and Saudi Arabia have implemented fiscal reforms and unleashed large-scale programmes to privatise assets, increase public-private partnerships, unlock value by monetising real assets and infrastructure, improve public benefits and services, develop social and human resources, and optimise government operations.
These initiatives, together with complementary legal and regulatory reforms and social changes, ultimately make these countries more attractive destinations for foreign capital.
The government-led initiatives have been a key driver of growth in the venture capital sector in the region, evidenced by the development of the startup ecosystem.
Push from wealth funds
Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), has been supportive of the ecosystem. A key aspect of its strategy has been the support of fund managers.
Two years ago, the PIF established Jada, a fund of funds company, for the sole purpose of promoting the development of a venture capital ecosystem.
By funding venture capital funds and private equity funds focused on the Saudi market, Jada’s mandate is to create a self-sustaining growth platform for local SMEs.
On the other hand, PIF’s Sanabil Investments commits approximately US$2 billion in capital per annum in private investments that include venture, growth capital and small buyouts. Sanabil aims to partner with originators of good business ideas – entrepreneurs who harness the innovations of mind and matter to fulfil societal needs in ways that are scalable and sustainable.
Take the newly-established eWTP Arabia Capital (eWTPA) for example, which launched its first fund in 2019, backed by the PIF and eWTP Capital (which is under Alibaba Group and Ant Group).
Within a short span of time, this $400-million fund has already invested in 16 companies across digital infrastructure, core technology and platforms, and consumer and enterprise services. Currently, 13 out of the 16 portfolio companies are already operating and growing the MENA markets.
The unique MENA offering
Home to 7.5% of the world’s population, the MENA region has a predominantly young population. Of the 600 million people in the region, more than 50% are under 25 years old. This enables a customer base that welcomes disruptive business models and a growing culture of entrepreneurship.
Traditionally, MENA has also benefitted from its geographical location as a gateway to both Africa and Asia. Given that one-third of the world’s population lives within a four-hour flight from Dubai, the region’s proximity to Africa and Asia is an attractive attribute for startups looking to capitalise on these vast emerging markets.
In H1 2021, 31% of MENA-based venture capital transactions involved investment from outside the region. Some of the larger acquisitions in the Middle East by foreign investors in recent years have shown the extent of opportunities that exist there. These include Uber’s acquisition of the MENA ride-hailing startup Careem in 2020 for $3.1 billion, and Amazon’s acquisition of MENA online retailer Souk.com in 2017 for $650 million.
These high-profile deals indicate an increasing strength in the underlying M&A market in the Middle East, creating more exit opportunities for both founders and investors. The challenge for the region is for local equity markets to mature to the point that listings on local exchanges such as the Abu Dhabi Securities Exchange (ADX) or Dubai Financial Market (DFM) become viable and more commonplace.
With the right balance between investment returns and startup potential, PEs and VCs are more intrigued by regions like MENA, which offers an interesting mix of investment options. We are also seeing a wave of startups of Chinese origin expanding into the region. Likewise, Southeast Asian countries which offer similar welcoming and flexible environments are also attractive to investors and entrepreneurs.
The author is the founding & managing partner at eWTP Arabia Capital.